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No Service tax on sale of under construction flats if contract price includes value of land

Service Tax - By: - Bimal jain - Dated:- 9-6-2016 - Dear Professional Colleague, We are sharing with you an important judgement of the Hon ble High Court of Delhi in the case of Suresh Kumar Bansal Vs. Union of India & Ors; Anuj Goyal & Ors Vs. Union of India & Ors [ 2016 (6) TMI 192 - DELHI HIGH COURT ] on the following issue: Issue: Whether Service tax is exigible on the consideration paid by flat buyers to a builder/ developer, for purchasing a flat in a complex, which was under c .....

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d on preferential location charges. Being aggrieved, the Petitioners filed Petitions before the Hon ble High Court of Delhi challenging the levy of Service tax collected by the Builder on the services in relation to construction of complex as defined under Section 65(105)(zzzh) of the Finance Act, 1994 ( the Finance Act ) read with the explanation introduced by virtue of the Finance Act 2010, as being ultra vires of the Constitution of India. The Petitioners also challenged Section 65(105)(zzzzu .....

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levy tax on immovable property; thus, the levy of Service tax on agreements for purchase of flats was beyond the legislative competence of the Parliament; Their Agreement with the Builder is a composite contract for purchase of immovable property and in absence of specific provisions for ascertaining the service component of the said Agreement, the levy would be beyond the legislative competence of the Parliament; There was no service element in preferential location charges which were levied by .....

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the Finance Act, 1994 . The Revenue also submitted that as the gross charges include value of land and construction material, only 25% of the Base Selling Price (BSP) charged by a Builder from the ultimate consumer is subjected to levy of Service tax. However, in case of preferential location charges, the entire amount charged by a developer is for value addition and therefore, the gross amount charged for such services is chargeable to Service tax under Section 66 read with Section 65(105)(zzz .....

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which are undertaken by the Builder directly or through other contractors. The object of taxing services in relation to construction of complex is essentially to tax the various activities that are involved in the construction of a complex and the resultant value created by such activities; It is a usual practice for Builders/ Developers to sell their project at its launch. Builders accept bookings from prospective buyers and in many cases provide multiple options for making payment for the purc .....

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ke in the project and in one sense, the services subsumed in construction services in relation to a construction the complex are rendered for the benefit of the buyer. However, but for the legal fiction introduced by the impugned explanation to Section 65(105)(zzzh) of the Finance Act, such value add would be outside the scope of services because sensu stricto no services, as commonly understood, are rendered in a contract to sell immovable property. Imposition of Service tax in relation to a tr .....

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tivities carried on by a builder for himself are deemed to be that on behalf of the buyer; The imposition of Service tax by virtue of the impugned explanation is not a levy on immovable property as contended on behalf of the Petitioner. The clear object of imposing the levy of Service tax in relation to a construction of a complex is essentially to tax the aspect of services involved in construction of a complex, the benefit of which is available to a prospective buyer who enters into an arrange .....

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uyer and a builder/ promoter/ developer in development and sale of a complex is a composite one. The arrangement between the buyer and the developer is not for procurement of services simplicitor; While the legislative competence of the Parliament to tax the element of service involved cannot be disputed but the levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component which is the subject of the levy; In the present case, there is no machine .....

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te contract which involves sale of land For the purposes of ascertaining the value of services, the Central Government has made the Service Tax Valuation Rules, but none of the Rules provides for any machinery for ascertaining the value of services involved in relation to construction of a complex; Rule 2A of the Service Tax Valuation Rules provides for determination of the value of service in execution of a composite Works contract but the said Rule does not ascertain determination of value of .....

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ent case, neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of Service tax; The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract. Challenge to levy of Service tax on preferential location charges under Section 65(105)(zzzzu) negated Prefere .....

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f the Finance Act is negated, however, the Petitioners contention that no Service tax under Section 66 of the Finance Act read with Section 65(105)(zzzh) thereof could be charged in respect of composite contracts such as the ones entered into by the Petitioners with the Builder, is accepted. The impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside. Therefore, the Hon ble High Court of D .....

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